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(Kitco News) – North America continues to be the largest cryptocurrency market in the world despite the regulatory crackdown by U.S. authorities, which has seen multiple enforcement actions brought against some of the largest players in the space in 2023, including lawsuits against Binance and Coinbase.

According to a report from crypto analytics firm Chainalysis, users in North America received an estimated $1.2 trillion in value on-chain between July 2022 and June 2023, which represents 24.4% of global transaction activity during that time period.

The bulk of the activity occurred in the U.S., “which ranks first overall worldwide,” Chainalysis said. “Canada also contributes significant transaction volume, placing seventh globally.”

While its retail segment is one of the most active in the world, the North American crypto market “is more driven by institutional activity than any other region with a whopping 76.9% of transaction volume driven by transfers of $1 million or more,” they said. “The region’s on-chain activity is split relatively evenly between DeFi and centralized exchanges.”

Regional transaction volume size. Source: Chainalysis

The region was not immune to the struggles of the broader crypto market over the past year as on-chain data shows that crypto activity in North America declined following a series of negative developments in 2022, including the bankruptcy of FTX.

But the collapse of Sam Bankman-Fried’s crypto empire was not the most impactful negative event for the North American digital assets market.

“Interestingly, crypto activity contracted more in the months immediately following the March banking crisis that saw Silicon Valley Bank and crypto-friendly banks Signature and Silvergate close down, and the ensuing temporary drop in USDC’s value in secondary markets,” Chainalysis said. “However, on-chain activity starts to tick back up beginning in June.”

North America transaction volume by transfer size, Jul 2022 – June 2023. Source: Chainalysis

As shown in the chart above, “transaction size data suggests that pullback from institutional investors was the primary driver in the overall decline in activity, as retail users and sub-institutional pro traders’ estimated activity remained consistent,” the report said.

Stablecoin usage slips

Stablecoin usage also declined in the region compared to other digital assets. Between February and June, stablecoin volumes fell from 70.3% to 48.8% of North America’s on-chain transaction volume. This is a trend that was seen across geographical regions.

“While the shift away from stablecoins was already underway before the banking failures in March, it’s possible that investor concerns over stablecoins following that incident have played a role in its continuation,” Chainalysis said. “Relatedly, stablecoin market capitalization sank to its lowest point in over two years this past summer.”

Despite these declines, stablecoins remain the most widely used type of crypto asset, accounting for more than half of all on-chain transaction volume to or from centralized services between July 2022 and June 2022, Chainalysis data show. More than 90% of stablecoin activity takes place in stablecoins pegged to the U.S. dollar, they said.

The report noted that U.S. regulators have a vested interest in exercising regulatory authority over stablecoins, “given the central role of USD-denominated reserves to these assets. If U.S. regulators can work to limit stablecoins’ role in [illegal activities], that would have huge, positive impacts on cryptocurrency-related crime given the huge share of overall crypto activity stablecoins represent,” the report said.

“Stablecoin regulation also gives regulators a chance to help ensure that the U.S. is home to the cryptocurrency businesses that will play a big role in expanding how the U.S. dollar is used globally as the digital economy continues to grow,” they added. “However, data suggests that more and more stablecoin activity is occurring through entities that aren’t licensed in the United States.”

Stablecoin inflows into U.S. licensed vs. non-U.S. licensed exchanges. Source: Chainalysis

Since the spring of 2023, the majority of stablecoin inflows to the 50 biggest crypto services have shifted from U.S. licensed services to non-U.S. licensed services, reversing the trend that occurred over the course of late 2022 and early 2023. As of June, a 54.6% share of stablecoin inflows to the top 50 services were going to non-U.S. licensed exchanges.

Chainalysis said that while U.S. entities were instrumental in seeding the stablecoin market and enhancing its legitimacy, “more crypto users are pursuing stablecoin-related activity with trading platforms and issuers headquartered abroad.”

“Unfortunately, this means the U.S. government is increasingly losing its ability to conduct stablecoin oversight and U.S. consumers are missing opportunities to engage with stablecoins with the safeguards provided by the US regulatory regime,” they said. “While Congress has shown interest in stablecoin legislation recently, it has yet to pass comprehensive regulation.”

Chainalysis said the real challenge for policymakers when it comes to passing stablecoin legislation “will be to strike the right balance between keeping consumers safe and creating a framework that allows crypto markets to continue growing and encourages innovation. Time is also of the essence.”

“There continue to be important debates around the regulation of stablecoins, such as the appropriate role of state regulators in registering and supervising stablecoin issuers,” said Jason Somensatto, head of North America public policy at Chainalysis. “These debates are resolvable and should be solved soon in the interest of global competition and necessary regulation.”

“The inherent transparency of blockchain technology empowers global regulators, including those in the U.S., to investigate and combat illicit activities efficiently,” he said. “This transparency can also enhance the enforcement of sanctions, allowing participants throughout the crypto ecosystem to screen for and detect activities involving sanctioned entities.”

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Declining interest in DeFi

One area where North America has seen a significant decline in activity is in decentralized finance (DeFi). “While the region still leads the world in DeFi usage by raw transaction volume, the share of North American crypto activity attributed to DeFi has fallen significantly over the course of the last year,” the report said.

North America value received by service. Source: Chainalysis

The report attributed this decline to the market turmoil over the past year, noting that “many DeFi protocols cater to the trading of highly-speculative, recently created assets not available on centralized exchanges – those are typically the first assets investors will pull out of when markets decline.”

Regulatory uncertainty was also cited as a contributing factor.

“Though challenging, developing such regulation is imperative as DeFi has many useful real-world applications like ​​trading, asset management, lending, and payments, to name just a few,” the report said.

Despite the decline in crypto activity, North America still ranks fourth in Chainalysis’ 2023 Global Crypto Adoption Index. “As the region rebounds from crypto winter, regulation will play an important role in its recovery,” the report concluded.